Jul 16, 2009

In a 2008 white paper, called Hypegiaphobia, KPMG stresses the importance that organizations want to be and must be 'in control' of a multitude of risks and therefore make enormous sacrifices to achieve this goal.

CEO, management and employees have to comply to so many simultaneous goals, and the consequences of not being compliant on a single issue are that high, that people fear to take individual responsibility in a organization.

In search of the balance between rules and trust, KPMG calls upon the parties involved to provide more space for individual responsibilities. In the mentioned white paper KPMG answers two key questions:

Are the high investments in risk management effective and do they really lead to a lower risk profile?

Does risk management overshoot its goal and produce undesirable effects, such as reduced entrepreneurial spirit, increasing litigation, a culture of fear and a potentially adverse effect on the competitive position?

Trust RulesMoreover, in 2009 KPMG extended their view on Hypegiaphobia by publishing a document called 'Trust Rules'.

Guts, vision and trust go hand in hand in a time of increasing litigation.

UnplugLately, numerous persons and organizations in the Netherlands have had the guts to “unplug”. Unplug is a new work style by which numerous (compliance) issues are handled in unconventional ways :

Getting rid of unnecessary rules, of fixed places and times

Dealing better with knowledge

Collaborating more

Taking more personal responsibility

All this with a a single focus: The client.

PrinciplesTo organize trust and to be able to trust, KPMG has formulated (on basis of client interviews) nine principles they call trust rules (mark: the noun has turned into a verb) :

Make contact personal

Define common goals

Set the right example

Build trust with sensible rules

Share responsibility and trust

Stay on course and keep calm, even when things go wrong

Rely on informed trust, not on blind trust

Be mild on misunderstanding but crush abuse

Dare to experiment and learn from experience

RiskIn a document called Signs of Safety, risk is defined as an increasingly defining motif of the social life of western countries.

However, risk is almost always seen as negative, as something that must be avoided.

Killing Black SwansTo put it simply: everyone is worried about been blamed and sued for something. Thus organizations have become increasingly risk-averse to the point of risk-phobia. Elimination of every Black Swan risk at any price, seems the unrealistic and never ending target.

New solutionsThe challenge for management, actuaries and accountants is to see and define Risk in terms of a potential big win and investment instead of only a potential big loss. This also means that - as a society - we have to reformulate rules and laws in a way that risks can be taken in such a way that failure, bankruptcy are or catastrophes are not (nearly) completely excluded anymore.

Often economies of scale lead to the rise of international (financial) companies that overshadow individual countries in terms of VAR.If country governments of such 'inhabited' international enterprises are convinced that an eventual bankruptcy of such a company would create great collateral damage and therefore is not an realistic option, things will have to change. In these cases governments have no other choice than to order by law:

a limitation of (international) company size

a limitation of reciprocal contracts between big companies

or...

to demand and allow companies to restructure themselves in such a way that, in case of a catastrophe, only a part of the company goes bankrupt and not the company as a whole

In these cases state (re)insurance is not a preferable solution. Pricing this risk would be too expensive or - even worse - not charging for this risk would lead to a situation where management can take every risk they want, because in case of a bankruptcy, the government would back up anyhow.

Risk-Phobia VirusAs actuaries we're extremely vulnerable to the 'risk-phobia virus'.Let's not get caught by this virus or hide in the bush, but take a calculated risk and go out to present our new solutions that make the difference in tomorrows risky world. Risk..., a never ending issue....

Disclaimer

Maggid is an actuarial professional, and like every actuarial professional or human being, he makes mistakes. Maggid encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong.

Nothing written here, or in my writings at Actuary-Info is an invitation to undertake whatsoever action, in particular to buy or sell any particular security; at most, Maggid is handing out educated guesses as to what the markets may do. Maggid thinks that "The markets always find a new way to make a fool out of you", and so he encourages caution with every action, in particular in investing. Risk control wins the game in the long run, not bold moves.

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